Table of Contents SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2004 Commission File Number 0-23006 DSP GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 94-2683643 (State or other jurisdiction of (I.R.S. Employer incorporation and organization) Identification No.) 3120 Scott Boulevard, Santa Clara, CA 95054 (Address of principal executive offices, including zip code) (408) 986-4300 (Registrant’s telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 per share (Title of class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ☒ No ☐ As of June 30, 2004, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the closing price of the Common Stock on June 30, 2004 as reported on the NASDAQ National Market, was approximately $794,232,567. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 1, 2005, the Registrant had outstanding 28,163,936 shares of Common Stock. Documents incorporated by reference: Portions of the Registrant’s proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end of December 31, 2004 are incorporated herein by reference into Part II, Item 5 and Part III of this annual report. Table of Contents INDEX DSP GROUP, INC. Page No. PART I Item 1. BUSINESS 2 Item 2. PROPERTIES 21 Item 3. LEGAL PROCEEDINGS 21 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21 PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 22 Item 6. SELECTED FINANCIAL DATA 24 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAL AND RESULTS OF OPERATIONS 25 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 38 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 73 Item 9A. CONTROLS AND PROCEDURES 73 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 75 Item 11. EXECUTIVE COMPENSATION 75 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 75 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 75 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 75 PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 76 SIGNATURES 81 i Table of Contents This report and certain information incorporated herein by reference contain forward-looking statements, which are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this report, other than statements that are purely historical in nature, are forward-looking statements. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include statements regarding: • Our belief that our 2.4GHz and 5.8GHz products will continue to generate a significant portion of our revenue for 2005; • Our expectation that our DECT products will drive our growth in 2005 and 2006, and products for home communication, including Bluetooth and Wi- Fi products, will drive our growth in 2007 and beyond; • Our belief that the consumer electronics industry is slowly recovering from the demand and inventory issues the industry experienced in the second half of 2004; • Our expectation that international sales will continue to account for a significant portion of our net product sales for the foreseeable future; • Our expectation that our planned future lines of products will integrate video, voice and data, as well as other communications technologies, and thereby enable us to strengthen our position as a leading supplier of multimedia communications products; • Our belief that our current investment in Wi-Fi technology may allow us to develop products that will improve the quality of video wireless communication in the residence, and may increase our market share in IP phones; • Our belief that we compete favorably in our industry with respect to price, system integration level, range, voice quality, customer support and the timing of product introductions; • Our expectation that our currently planned future products will enable connectivity of cellular phones to fixed-line phones and will also include Wi-Fi capacities; • Our expectation that we can capitalize on the industry trend for deployment of broadband to the residence by adding VoIP capabilities to our chipsets designated for cordless phones; • Our belief that the 49% gross profit figure we achieved in 2004 is not sustainable over the long term; • Our belief that new developments in the home residential market may adversely affect the revenues we derive from our IDT products; • Our belief that the development of a portfolio of “system-on-a-chip” solutions may increase our operating expenses and reduce our gross profit; • Our belief that to remain competitive, we must achieve higher levels of design integration and deliver new integrated products on a timely basis, which will require us to expend greater research and development resources, and modify the manufacturing processes for some of our products; • Our belief that relations with our employees are good; • Our expectation that research and development costs will increase in absolute dollars in 2005; and • Our anticipation that our available cash and cash equivalents at December 31, 2004 should be sufficient to finance our operations for both the short and long term; This Annual Report on Form 10-K includes trademarks and registered trademarks of DSP Group. Products or service names of other companies mentioned in this Annual Report on Form 10-K may be trademarks or registered trademarks of their respective owners. 1 Table of Contents PART I Item 1. BUSINESS. Introduction DSP Group, Inc. is a fabless semiconductor company in the short-range residential wireless communications market. By combining our proprietary technologies and advanced design methodologies, we offer original equipment manufacturers (OEMs) and original design manufacturers (ODMs) complex integrated circuit (IC) solutions. Our system-on-a-chip solution includes applications for digital 900MHz, 2.4GHz and 5.8GHz telephony, 1.9GHz—European Digital Enhanced Cordless Telecommunications (DECT) telephony, and Bluetooth systems for voice, data and video communication in the residential and SOHO/SME (small-office home-office and small to medium enterprise) environment. In addition, we offer IC products that are used in hand-held Digital Voice Recorders, MP3 players, Voice over Internet Protocols (VoIP) phones, residential gateways, and Integrated Access Devices (IADs). We were incorporated in California in 1987 and reincorporated in Delaware in 1994. We completed our initial public offering in February 1994. In November 2002, we transferred the assets and liabilities of our DSP cores licensing business to one of our then wholly-owned subsidiaries and immediately after the separation, the subsidiary affected a combination with Parthus Technologies plc to form Ceva, Inc. (f.k.a. ParthusCeva, Inc.). We distributed all of the common stock of our then wholly-owned subsidiary to our stockholders in connection with the separation. In anticipation of the separation, we reclassified the DSP cores licensing business as discontinued operations in our financial statements for the years ended December 31, 2002, 2001 and 2000. Industry Environment and Our Business Over the past two decades communications technology has evolved from simple analog voice signals transmitted over networks of copper telephone lines to complex analog and digital voice and data signals transmitted over hybrid networks, such as copper, wireless transmission over radio frequencies, Digital Subscriber Lines (DSL) and cable lines. In addition, information is increasingly available via wired and wireless networks through a variety of access devices, including cordless phones, cellular phones, personal computers, personal digital assistants (PDAs), and digital cable and satellite set-top boxes. Moreover, the desire to leverage existing telecommunications infrastructure,